With Tokyo on holiday, liquidity was thin at the start of trading for the week and with little data on the calendar currencies meandered most of the Asian and early European trade with the exception of cable which came under fresh selling pressure as Brexit rhetoric heated up over the weekend.

In a SKY interview PM May stated that UK could not expect to hold on to “bits” of its membership after leaving the EU, seeming to stress the “hard Brexit” line that UK would not compromise on the immigrant issue in return for access to the single market.

Meanwhile Scotland’s First Minister Nicola Sturgeon warned the Prime Minister that she was not “bluffing” over the prospect of a second Scottish independence referendum, Scotland voted to stay in the EU and the idea of a “hard Brexit” is clearly unappealing to Ms. Sturgeon’s constituents.

The currency markets were clearly spooked by the heated rhetoric with traders beginning to worry about the possibility of a hard Brexit and a diminished UK and drove GBPUSD well below the 1.2200 mark towards 1,2125 before finally finding some support. Sensing that Ms. May may have overplayed her hand, the PM’s office quickly came out with a statement that UK wants the best deal within a single market, trying to assuage the markets and reassure its intent to negotiate for some sort of access.

With PM May trying to do her best Margaret Thatcher imitation prospects for some sort of a reasonable compromise appear bleak. Although UK economic data has been surprisingly robust, the markets may begin to look past the short terms gains and begin to sell sterling in earnest if it looks as though UK would be shut out of the single market. Cable therefore now looks vulnerable to test the flash crash lows of 1.2000 if the Brexit fears continue to amplify.

Elsewhere price action was subdued with USD/JPY seeing a mild extension of its bid from Friday’s NFP report which showed healthy wage growth gains of 0.4%. Still the pair failed to hold the 117.50 level and came back towards 117.00 by late morning European dealing. With little US data on the calendar this week until Friday’s US Retail Sales report, USDJPY could consolidate for most of the week around these levels, especially if US yields remain contained for the time being.